If the dollar drops prices will rise

[blazespinnaker]

One problem I have with ka-poom, is that it somewhat relies on a drop in prices causing near deflation and a over correction by the fed.

However, I think given the current strutural imabalances, a more likely probability will be that the USD will fall and therefore the costs of imports will increase .. alongside inflation.

Therefore I think the higher probability occurence in the current environment is stagflation, recession and the fed hiking.

[Finster]

Exactly

If the dollar drops prices will rise.

That's what rising prices are.

It is not 'things' getting more expensive.

[EJ]

Re: Exactly

That's what rising prices are.

It is not 'things' getting more expensive.

Finster's got it: Poom is existing dollars coming home. The result will be rising prices of imported goods, especially oil. Stagflation is a given.

See: Inflation is Dead! Long Live Inflation!

[blazespinnaker]

Re: If the dollar drops prices will rise

Sure, but with stagflation where is the deflation cycle?

[blazespinnaker]

Re: If the dollar drops prices will rise

going to post as new thread..

[Finster]

Re: If the dollar drops prices will rise

Sure, but with stagflation where is the deflation cycle?

I don't like the word "stagflation", because it assumes that somehow simultaneous economic weakness and inflation is unusual and therefore deserving of a special name. The classic Keynesian-Phillips Curve-NAIRU theory that assumes a tradeoff between economic growth and inflation. To which I say, poppycock and balderdash. The 1970s, 1990s, and everything in between prove otherwise.

To understand how deflation fits in with inflation, you need to appreciate there are different meanings of the terms in use. Sometimes "deflation" is used to refer to a contraction of money and credit and other times a rising value of the currency (evidenced by falling prices). You can even further subdivide the first case into a contraction of nominal money credit and a contraction of the real volume of money and credit.

Depending on which of the three meanings of deflation is being used, the environment can look very different. Usually a contraction in the volume of money and credit is associated with a rising value of the currency. Less money supply naturally goes with the money being more valuable, which we notice in the form of lower prices. In this circumstance, it doesn't matter much whether you're using the term deflation to refer to money contraction or rising currency, because they go together like hand and glove.

Suppose, though, that the nominal amount of money and credit grows, but that the value of the currency falls even faster, such that the total real value of money and credit is actually falling. In this case you have rising prices (inflation) at the same time as the real supply of money and credit is falling (deflation).

Sound confusing? Unlikely?

Maybe so, but it is an extremely important phenomenon. This is what happened in the 1970s. It also happened in 1933-1949. In both cases, the Federal Reserve sought to counter the effects of a real deflation with nominal inflation. In fact, what is called "inflation" usually happens in a period of real deflation.

Many analysts make this same mistake. They fail to distinguish between the pre-1933 and post-1933 periods of the deflationary 1930s, which were polar opposites in terms of currency value even while both were the same in terms of the contraction of real money and credit. The pre-1933 period - which is what most people think of as "deflationary" (in all three of the above senses), was characterized by falling prices and a rising value of the dollar. Gold prices held up only because gold and the dollar were tethered to each other by the government. The prices of silver and other commodities, fell, and so would those of gold were it not for this government enforced peg. After that link was severed in 1933, however, the thirties much more closely resembled the 1970s, and gold prices (where it was freely traded) rose in dollar terms as the dollar lost value.

In the sense of the term used by most market commentators and understood by most investors, however, "deflation" means falling prices and a rising currency. This is most certainly NOT a tailwind to gold prices, and in fact the last time we had such an experience - in the twin deflations of 1997-1998 and 2000-2001 - gold prices fell. Right along with those of most other commodities.

So-called "stagflation" is nothing more than what you get when the Federal Reserve tries to counter the effects of a real deflation with nominal inflation.

[fourthirtysix]

Re: If the dollar drops prices will rise

Many analysts make this same mistake. They fail to distinguish between the pre-1933 and post-1933 periods of the deflationary 1930s, which were polar opposites in terms of currency value even while both were the same in terms of the contraction of real money and credit. The pre-1933 period - which is what most people think of as "deflationary" (in all three of the above senses), was characterized by falling prices and a rising value of the dollar. Gold prices held up only because gold and the dollar were tethered to each other by the government. The prices of silver and other commodities, fell, and so would those of gold were it not for this government enforced peg. After that link was severed in 1933, however, the thirties much more closely resembled the 1970s, and gold prices (where it was freely traded) rose in dollar terms as the dollar lost value.

I found the following post (quoted below) interesting, but i'm not sure i completely understand how *everything* including dollar, commodities, stocks, etc can all drop. are there no asset classes that hold value in such scenarios? why would central banks dump gold?

FACTS:
1) If the dollar collapses the world economy collapses. The world is dependent upon american consumption at the margin.

2) The Fed cannot unilaterally create inflation - Japan has proved that over the past 16 years.

3) If gold has a significant run up it will be dumped by the IMF and central banks. Even the US dumped gold in the past, though it is a producer country. Central banks have agreed to limit sales to help hold up the price, but if everything goes to heck I wouldn't count on them holding to that.

4) Without strong American demand (as a result of a dollar collapse or significant recession) commodity prices (oil, platinum, etc) will also collapse.

Though it is clear that a "Perfect Storm" is brewing it is very unclear has to what might be a safe harbor.

Thanks,
Stuart

taken from comments of http://www.rgemonitor.com/blog/roubi...6#readcomments

[Finster]

Re: If the dollar drops prices will rise

I found the following post (quoted below) interesting, but i'm not sure i completely understand how *everything* including dollar, commodities, stocks, etc can all drop. are there no asset classes that hold value in such scenarios? why would central banks dump gold?

FACTS:
1) If the dollar collapses the world economy collapses. The world is dependent upon american consumption at the margin.

2) The Fed cannot unilaterally create inflation - Japan has proved that over the past 16 years.

3) If gold has a significant run up it will be dumped by the IMF and central banks. Even the US dumped gold in the past, though it is a producer country. Central banks have agreed to limit sales to help hold up the price, but if everything goes to heck I wouldn't count on them holding to that.

4) Without strong American demand (as a result of a dollar collapse or significant recession) commodity prices (oil, platinum, etc) will also collapse.

Though it is clear that a "Perfect Storm" is brewing it is very unclear has to what might be a safe harbor.

Thanks,
Stuart

taken from comments of http://www.rgemonitor.com/blog/roubi...6#readcomments

Beware of vague statements and opinions touted as "FACTS"!

There are so many things wrong with this passage I scarcely know where to begin. For starters, exactly what is meant by "the dollar collapses" and "the world economy collapses". Yeah, I know people talk this way all the time, but they get a lot of things wrong, too. If you want to have a leg up on the average sloppy analysis, you have to ask questions like that and sharpen up your definitions.

I haven't the foggiest idea what Stuart is talking about. Worse yet, neither does he. The "world economy collapses" like it did in 1930-1932? Or like it did in 1970-1979? It makes a huge difference in how you position your portfolio!

Next, what the heck does he mean by "gold has a significant run up" and "it will be dumped by the IMF and central banks"? Does he mean gold increases in real value, or the dollar falls in value such that it takes many more of them to buy the gold?

If it's the former, then why wouldn't dollars and gold both be "safe harbors"? If it's the latter, then why wouldn't gold be a "safe harbor"?

Then we have "Without strong American demand ...". What does he mean by "demand"? How does he determine whether such "strong demand" exists? How does he measure it?

Finally, there is the puzzling and confused remark "...(as a result of a dollar collapse or significant recession) commodity prices (oil, platinum, etc) will also collapse". Let's see ... we have a "dollar collapse" and "commodity price collapse". But if the dollar falls in value, in relation to what did it fall? If commodity prices fall, in relation to what did they fall?

They can't both fall in relation to each other, that's for sure. Maybe they will fall in relation to stocks or bonds? If so, then why wouldn't we be calling that a bull market in stocks or bonds??? :confused:

In sum, I think you are right to wonder how the heck everything can collapse ...

[Sapiens]

Re: If the dollar drops prices will rise

If you want to have a leg up on the average sloppy analysis, you have to ask questions like that and sharpen up your definitions.

.

.

[spunky]

Re: If the dollar drops prices will rise

Err am I ill ???? I am agreeing with Finster ??? :p

[Finster]

Re: If the dollar drops prices will rise



In case it is not clear, I don't mean to launch a personal attack on poor Stuart. I don't even know him and he's not here to defend himself. But he seems to be suffering from a common malady, and possibly someone else like him may stumble across this thread.

At the risk of a little cheap satire, he seems to be the victim of GBD - Generalized Bearishness Disorder. He is attentive and sincere, and reads a lot of doomsday press, and comes out with the impression that everything is going to go down. Dr. Finster prescribes, inter alia, a casual cruise through the thread Something’s Always Going Up.

My thesis, however, is twofold. Value Is Relative. But even if my Theory Of Financial Relativity (avatar no accident;)) is flat-out wrong, to the extent it were, there would be nothing the investor could do about it. We may only choose from the menu of assets the world provides us with. Any investment that might offer better performance than something available to us simply can't be worried about. Thus, even a benchmark of perfection would be simply the best performing of what's out there. What isn't simply isn't relevant.

[blazespinnaker]

Re: If the dollar drops prices will rise

In sum, I think you are right to wonder how the heck everything can collapse ...

Certainly everything can collapse. Bird flu, war, massive deflation, etc... What's going up in that scenario? Well, I guess suicide rates and derivatives.

[jk]

Re: If the dollar drops prices will rise

Certainly everything can collapse. Bird flu, war, massive deflation, etc... What's going up in that scenario? Well, I guess suicide rates and derivatives.

deflation means cash gets more valuable, and tbonds more so.

[blazespinnaker]

Re: If the dollar drops prices will rise

Yes, that is true. While our neighbours and families are off dying, we can roll around in our money Good point!

[Finster]

Re: If the dollar drops prices will rise

Certainly everything can collapse. Bird flu, war, massive deflation, etc... What's going up in that scenario? Well, I guess suicide rates and derivatives.

Irrelevant. Sure, there might be a nuclear war wiping out virtually every imaginable asset. But a nanosecond of any investor's time spent thinking about it is wasted.

You can spend your time thinking about that imaginary absolute real rate of return. You can spend it equally fruitfully debating the proverbial angels on the head of a pin. Or you can instead deal with reality and focus instead on the relative movements of the asset classes.

In the real world, everything is relative.